Liquidity in Cryptocurrency Market and Commonalities across Anomalies

Abstract

In this paper, we examine how liquidity affects cryptocurrency market efficiency and study commonalities in anomaly performance in cryptocurrency market. Based on the unique features of cryptocurrencies, we build a model with anonymous traders valuing cryptocurrencies as payments for goods and investment assets, and find that in the long-run equilibrium, decreases in funding liquidity translate into lower asset liquidity in the cryptocurrency market. Empirically, we observe that the widely recognized stock market anomalies also exist in the cryptocurrency market, though some have opposite long/short legs. In addition, we also find supportive evidence that a decrease in cryptocurrency liquidity enhances hedge portfolio returns based on anomalies while preventing the cryptocurrency market from achieving efficiency.

Keywords: Cryptocurrency, Asset Liquidity, Funding Liquidity, Anomalies

JEL Classification: G11, G14